Most Americans who want to own a house – and can afford it – follow a fairly straightforward path to their dreams.
They start with a loan from a bank or mortgage company, institutions that are subject to state and federal regulations. When buyers close on the home they want, the agreement is registered with the government, usually at county offices.
Americans who do not qualify for a conventional mortgage but still want a house to call their own sometimes opt for a thinly regulated financial arrangement called a contract for deed. In these deals, the sellers function like lenders. They collect an initial down payment and then monthly payments.
The buyers in contract for deed agreements usually pay for taxes and insurance and they often pick up the tab for improvements and repairs on the property, even before they have title to it.
Often it’s only when the buyer makes the final payment that the title of the property shifts from the seller to the buyer.
Real estate experts, lawyers and consumer watchdog groups say these arrangements – as well as similarly structured rent-to-own contracts – rarely end with the buyer owning the home. What tends to happen instead is the buyer loses out through a process called forfeiture – often for falling behind on payments – while recouping none of the equity they would have built up in a traditional mortgage.
For example, when the Pennsylvania Attorney General sued a company that did hundreds of rent-to-own contracts in that state, it discovered that only 2% of buyers succeeded in obtaining the deed for the property – signifying that they were now homeowners.
“(Contracts) can be drawn up in a way that makes it almost impossible to succeed,” said Alex Kornya, general counsel for Iowa Legal Aid. “You lose every dollar that you’ve put into that house and the contract seller walks away with a total windfall.”
In Iowa, there have been nearly 3,700 contracts for deed recorded at county offices since 2008, according to figures furnished to the Midwest Newsroom by ATTOM, a provider of mortgage data.
The numbers were lower in Kansas, Nebraska and Missouri, but figures likely underreport how many of the deals happen in those states because they have few to no laws requiring that these deals be registered at county offices.
Lance Lowenstein, an attorney in Kansas City, Missouri, says he sees cases involving these contracts about once a week.
“Contracts for deed are kind of like the ‘buy here, pay here’ car lots of the real estate business,” he said in an interview in his office in northeast Kansas City, home to many immigrants and economically struggling communities.
Contracts for deed – also known as land contracts, installment sales or bond for deed – proliferated nationally and particularly in the Midwest in the wake of the 2008 subprime mortgage crisis. Rent-to-own – sometimes called leases with an option to purchase – have similar characteristics that often shift the advantage of such transactions to sellers.
Investors, ranging from small-time buyers with just a few houses to Wall Street hedge funds, swooped in after the housing crisis and bought properties in bulk out of foreclosure or from government-sponsored mortgage buyers Fannie Mae and Freddie Mac. The houses, often uninhabitable or in poor condition and in low-income communities, are typically marketed at those most at risk for exploitation: Black, Latino or immigrant residents.
And while attorneys general in states in the Northeast and Great Lakes region have gone after large-scale contract for deed or rent-to-own sellers who use deceptive tactics, attorneys general in the Midwest do not often take enforcement action.
All Tiffany Martino wanted was to buy a home.
“Something my grandkids could come in that was always the same house,” she said.
About seven years ago, she moved from Gold Beach, Oregon, where she said housing prices were “outlandish” to North Platte, Nebraska. She spotted a house she could buy for $78,000.
Martino could see the place needed some work.The bathroom needed an overhaul. The floor was mostly missing in one room and had to be replaced. The paint was in bad shape. And she would have to do some landscaping.
But Martino needed a place to live.
“At the time when you’re in need and you don’t got a lot of down payment and somebody is willing to work with you, you’re just like, ‘Yeah, that sounds good, let’s do that,’” she said.
Martino made a $1,400 down payment to the owner. He agreed she would make $500 monthly payments until the house was paid off. She understood that she was renting to own. When repairs came up, she would call the owner.
“He says, ‘You’re buying this place, you’re responsible for any repairs that occur, you’re responsible for any of that,’” Martino said.
Martino said she put some $10,000 into the property, which included removing trees and doing landscape work. And she made about $30,000 in rent payments over those five years.
But she fell behind – she says about $3,000 in arrears – and her landlord took her to court to have Martino evicted.
She eventually got in touch with Jeff Eastman, the managing attorney for Legal Aid of Nebraska, who represented her.
Eastman told Martino that she risked having a judge order her to pay the owner if the case went to trial. So they settled: Martino walked away from the house and the owner did not pursue her back rent.
“When they (buyers) leave, they left their investment in the property and they don’t have anything to show for it,” Eastman said. “Of course, they’re quite angry about it.”
Including Martino, who thought she was building toward home ownership.
“It was actually pretty much a letdown, you know?” Martino said. “It wasn’t a good feeling to know that wasn’t the case and all the money I dumped in there, I don’t get that back. It pretty much devastated me, really.”
A 2019 study by the Joint Center for Housing Studies of Harvard University outlines an earlier era of contracts for deed in Chicago, where blockbusting and redlining depressed home prices in the 1960s and 1970s. Investors used contract sales to sell properties at inflated prices with high interest rates to people who could not get a conventional mortgage.
“These contracts were designed to fail,” the Harvard study said, “Allowing the seller to reclaim the property, a form of equity stripping.”
Taz George, a senior research analyst at the Federal Reserve Bank of Chicago, said that access to mortgages is an important way for families to build wealth.
George, who co-authored the Harvard study, said lenders rarely underwrite loans in low-income communities where homes are priced at less than $100,000 and often need repairs. So contracts for deed sometimes fill the void.
“Really what we found is that communities that have a high number of land contract sales, have a host of other housing and economic challenges,” George said.
Contracts for deed are marketed as a way for people who can’t get a conventional mortgage to realize the dream of owning a home.To Kornya, the Iowa Legal Aid lawyer, such a pitch echoes that of another enterprise that targets low-income borrowers.
“That’s the exact same argument that payday lenders use.It’s nothing new: ‘We need to exploit low-income people because otherwise their lives would be worse,’” Kornya said.
While never ideal, lawyers and experts say contracts for deed can be one of few options for some real estate transactions. Buyers who lack credit history, have damaged credit or who cannot make a down payment often do not qualify for a loan from banks or mortgage companies.
Echoing the Harvard findings, the Joint Center for Housing Studies says traditional mortgage companies are reluctant to make loans in distressed neighborhoods, leaving seller-financed loans or a contract for deed, the instrument of last resort.
“We find that the ratio of new mortgage originations to households is one of the strongest predictors of contract for deed activity,” the study says.
A lack of financial services in low income communities and – increasingly – in rural communities influences the demand for non-traditional lending agreements.
Michael Duffy, a semi-retired attorney who has handled dozens of cases involving abuses of real estate contracts, said in spite of the risks, contracts for deed can be useful with responsible sellers.
“I don’t think (contracts for deed) should be illegal,” Duffy said. “They just need to be more tightly regulated. It’s kind of a wild west out there.”
Iowa tightened some of its land contract laws after a 2003 scandal involving the Wolford Group, a family enterprise accused by the Iowa Attorney General of committing fraud when it bought and sold homes under risky land contracts.
Iowa sellers cannot enforce a land contract that is not recorded at a county office. And sellers who don’t record land contracts after 90 days are subject to daily fines.
Ashlee Kieler, a spokeswoman for the Iowa Attorney General, said the office still receives complaints about land contracts since the Wolford scandal and the office handles them as they arise.
“We have not had any recent litigation,” Kieler said in an email.
A spokesperson for the Nebraska Attorney General declined to say if the office has brought any enforcement action on contract for deed or rent-to-own sellers.
Asked if the Missouri Attorney General has pursued such sellers, a spokesman pointed to a 2014 case in Jackson County where it sued Tri-State Holdings for a contract for deed scam in Kansas City’s predominantly Black communities.
The Kansas Attorney General did not respond to a request for comment.
Attorneys general in other states have pursued large-scale contract for deed operators that have done business in Kansas, Iowa, Nebraska and Missouri.
Vision Property Management, a hedge-fund backed enterprise in South Carolina, at one point owned 10,000 properties nationally, including the Midwest, according to a court filing.
In 2019, the New York Attorney General sued Vision and its affiliates, portraying its business model as one built on deceptive and abusive practices that gave Vision, “all the benefits and advantages of being both a mortgagee and landlord, without any of the associated risks or responsibilities of those roles.”
New York buyers lived in homes that the lawsuit said were uninhabitable: There were pest infestations, bad electric wiring, rotted floors and roofs and mold and asbestos, among other hazards.
Attorneys general in Wisconsin, Maryland and Pennsylvania have pursued claims against Vision.
In 2019, FTE Networks acquired Vision. FTE said it was beginning to transition away from Vision’s rent-to-own business model, according to a filing with the SEC.
FTE still faces litigation related to Vision’s business.Vision also faces a class-action lawsuit in Michigan, where plaintiffs accuse the business of systematic deception.
The company said in an SEC filing in 2020 that it may not have enough liquidity to fund a legal defense and an adverse outcome in those cases could have a material effect on its finances.
A seller disappears
It was May 9, 2014, when Maricela Orozco signed her name alongside that of Mauro Lopez to buy his home on the east side of Kansas City, Missouri, for $22,000.
A friend told her he worked construction with Lopez, who wanted to sell his house to keep it out of foreclosure. Orozco agreed to pay Lopez $1,800 as a down payment, clearing him of back property taxes, before she moved in, according to the paper contract she kept folded in a white envelope. The contract further outlines she would submit $500, in cash, every month for 44 months. After a five-day grace period, there would be a $50-dollar late fee, with an additional $5 dollars for every additional day.
Orozco had seen the inside and knew it was still in rough shape.
“Walls not done. Little bit of the bathroom finished. No good plumbing,” she said. “But I say, ‘OK,’ we fix it up’. And I move in with my kids, fixing things little by little when I have the money.”
In keeping with the contract for deed model, the tenant is responsible for improvements and repairs to the property.
“A contract for deed transaction has this fundamental problem that the buyer is being told they have all duties of homeownership and burdens of homeownership but they don’t get the protections of the right of foreclosure and they don’t have a deed and they don’t have a right to sell the home and realize the equity,” said Sarah Mancini, an attorney with the National Consumer Law Center. “So there really is a structural unfairness.”
At the time, Orozco didn’t have authorization to live in the United States and spoke little English. She did not know what a property title was or how it was transferred. It never occurred to her to have a lawyer look over the contract, find out if the title was clear of prior debt or do a background check on Lopez.
She never thought someone from her own community would cheat her.
“In the Latino community, we try to help each other,” she said. “We deal with the same issues, like language. We don’t understand the laws…He believed in me. I wanted to believe in him.”
After 44 months of regular payments, and more than $10,000 in home improvements, Lopez disappeared, never giving Orozco title to the house.
Family and friends say he’s in Mexico, but they don’t know where.
Getting a clear title is a frequent problem with contracts for deed. Real estate lawyer Lowenstein said he has a current client who paid off a five-year contract, only to learn the title she received is burdened with a mortgage worth $17,000. She had no idea until she tried to sell the house. Lowenstein says if the seller doesn’t pay off the mortgage, he and his client will go after him in court. But even if this client wins, Lowenstein probably will not be successful in collecting a judgment.
“If he’s not credit-worthy and has no assets, it’s uncollectable,” Lowenstein said.
Contracts for deed often mask the true cost of a property. Like Orozco, buyers typically don’t ask for an inspection or home appraisal. Orozco was relieved that Lopez accepted a $500 monthly payment, all she could afford with her income. She had not considered the cost of making the place habitable – replacing the drywall, buying appliances for the kitchen and repairing the plumbing and electrical systems.
“It was definitely in the thousands,” she said, “Probably more.”
Some people who sign contracts for deed end up in troubling situations, like the case of Sylvia Juarez.
In the mid 2000’s Sylvia Juarez got divorced in Kansas City, Missouri, and needed a home for herself and her three young children.
Driving around one Sunday, she saw a house with a sign in the yard: “For Sale by Owner.” She called the number and soon met with Travis Overs, who claimed to be the owner of the home.
“We made an appointment to meet at Denny’s downtown,” Juarez said. “He was very nice and dressed up,” she said. He’d brought along a Spanish-speaking interpreter.
She’d only walked around the house one time, from the outside, peering in at the windows. When she asked Overs if she could see the inside, he told her no, saying there were others interested in the property and he’d need a decision right away.
He said he needed $8,000 for a down payment immediately or he’d offer the house to someone else.
Juarez wanted to get a cashier’s check from a bank, but Overs insisted on cash. When she asked to see the title, he said he’d bring it over later.
“We needed the house so we gave him the money: Fives, tens, twenties, fifties. And he gave us the key.”
A few months later, there was a knock at the door. Law enforcement officers told her she was being evicted for non-payment of rent.
“I told them, ‘No, we signed the paper. We gave him the money and he gave us the key. We went over, cleaned up and put our stuff in.’” she said.
The next day, sheriffs’ deputies came and put all the Juarez family’s belongings out on the street. It turned out Overs never owned the property at all.
Attorney Michael Duffy was able to find Overs and get Juarez’s $8,000 down payment back, but she lost all the money she’d paid in repairs and maintenance.
Attempts to reach Overs were not successful.
Maricela Orozco, who lost thousands of dollars, is still without title to her house seven years later. Her sister is living there, maintaining it and paying the taxes.
Lawyers say Orozco won’t get a judgment that mortgage or title company will accept unless Lopez, the seller, can be contacted and notified. Meanwhile, he could reappear at any time and take the property back.
“So, even though nobody has come back to say it’s not mine, I don’t have the papers”, Orozco said. “So, it’s not. All I wanted is to own a home but this is still not really my house.”
A St. Louis case
In 2018, Justine wanted to move back to St. Louis.
She logged onto Zillow and spotted a house she liked in north St. Louis.It was on an acre of land. It had four bedrooms. It was on the bus line.
“I fell in love with the house,” says Justine, who asked that the Midwest Newsroom not use her real name because she is in a program to protect victims of domestic abuse.
The listing took her to a company called Joint Ops, which advertised the home.When Justine called, a Joint Ops employee gave her a code to go inside and check out the house. Justine, who is visually impaired, relied on her then-boyfriend to assess the property.
Her boyfriend thought it needed some fixing up, but described the house’s needs as mostly cosmetic: A fresh coat of paint would help, some windows needed replacing.
Justine lived on social security disability and had children to care for. Her total income was about $1,300 a month. Her credit score was low, and that made the prospect of buying a house difficult.
A Joint Ops employee, according to court records, said it had a program that could help her. She would give Joint Ops a $3,000 down payment and then make $500 payments each month afterwards. After two years, she could exercise an option to buy the home for $65,000.
“They were in a hurry to get me to accept the contract with them,” Justine said.
She couldn’t move in until she had an occupancy permit. When an inspector visited the house, things took a turn for the worse.
“It was one of those things that as you go more damage unfolds,” she said.
The roof sprung major leaks. There was mold, mildew and termite damage throughout the house. The paint in the house had dangerous levels of lead.
Justine set out to start making repairs while making payments on a house she couldn’t live in for 18 months. Joint Ops in January 2020 took Justine to court in St. Louis County Associate Court when she was $500 – one month – behind on her payments.
“I felt really sad,” Justine said. “This was something my children were all looking forward to moving into this house. I put all our hopes and dreams into this.”
Rob Swearingen, an attorney with Legal Aid of Eastern Missouri, took Justine’s case. He said the terms of the Joint Ops deal set his client up to fail.
“What does failure mean?” he said. “Failure meant (Joint Ops) got to keep all the money and the house. That’s kind of a nice deal: You can’t lose either way, can you?”
Swearingen fought Joint Ops’ lawsuit, and the two sides eventually settled with Justine getting back $9,200. Jimmy Vreeland, who started Joint Ops in 2014, acknowledged the situation with Justine was his company’s mistake.
“We would never do that deal again,” he said in an interview.
Vreeland said his company rarely does lease with purchase options anymore and that he prefers standard leases because they involve more regulations and legal codes.
“That’s why I like doing regular leases now because it’s so black and white,” Vreeland said.
Vreeland said lease with purchase options can work in the right situations. When he does do a lease with a purchase option, the buyer is typically a contractor who can do the work of fixing up a house.
“If you‘re on the consumer side, I would enter into it with care for sure,” Vreeland said.
He noted that the next tenant who took up the house Justine tried to buy was able to do work on the house and is happy with the arrangement.
Meanwhile, Justine said her story has a happy ending. After settling her case with Joint Ops, she was able to get herself into another house in St. Louis County, one she calls “a nice place to live.”
This story comes from the Midwest Newsroom, an investigative journalism collaboration including KCUR 89.3, IPR, Nebraska Public Media News, St. Louis Public Radio and NPR.